Shares of connected-fitness company Peloton Interactive (PTON -0.32%) rose more than 400% in 2020, making it one of the best stocks of the year. But this year's results are reversing: Peloton is one of 2021's biggest losers, down roughly 40% from all-time highs as of this writing.
Many investors are understandably fearful about Peloton stock. But I believe each valid concern can be countered with good reasons to push fear aside and buy the stock right now.
Image source: Peloton Interactive.
1. It benefited from the pandemic.
Peloton's fiscal year is a little confusing, so let's start by making sure we're all thinking the same thing. Fiscal 2020 ended June 30, 2020. And investors expect the company to report results for its fiscal third quarter of 2021 on May 6.
Having addressed this housekeeping item, we can move to the first topic: Peloton's business was built to operate even in the harsh economic environment of the pandemic. This was reflected in the company's stellar financial results last year. From fiscal 2019 to fiscal 2020, revenue exactly doubled to $1.8 billion. And during the last six months of calendar 2020, revenue was up 163% from the comparable period of 2019.
Thanks to its year in the spotlight, Peloton also enjoyed stunning brand-awareness growth. Prophet is a brand consultancy company that every year puts together what it calls the Brand Relevance Index. On the 2021 list are brands that we'd expect to find there: legacy names like Apple, Lego, and Whirlpool's KitchenAid. But surprisingly, taking the second position this year (behind only Apple) was Peloton.
Between revenue growth and brand awareness, Peloton was a great pandemic stock. But it's not just a pandemic stock. It was successful long before the coronavirus propelled its business. In fact, it doubled revenue every fiscal year from 2015 through 2020. And it expects more than 100% growth in fiscal 2021 as well, having revised its original guidance higher.
Therefore, 2020 wasn't a one-hit wonder; it was business as usual for Peloton. And this impressive track record of revenue growth is the first great reason to buy Peloton stock.
Image source: Getty Images.
2. Competition is increasing!
Peloton offers premium exercise hardware and an ongoing subscription to video content. This business model is being increasingly imitated. Newer businesses have popped up like lululemon athletica's Mirror. Furthermore, established companies like Nautilus have moved toward adopting this fresh business model. And investors fear this encroaching competition will eat into Peloton's business.
In my opinion, when competition increases, it signals the first-mover has officially and irreversibly disrupted its market. After all, home-exercise equipment is nothing new. But Peloton was on to something with its subscription-content enhancements. By motivating users with upbeat instructors and gamified features, Peloton has created a superior experience. These machines aren't glorified coat hangers! So far in fiscal 2021, Peloton users have worked out more than 20 times per month on average.
Because the machines are well used, I don't think the competition can steal Peloton's existing customer base. Indeed, the company's retention rate is 92%. But what about future customers?
Peloton uncovered a superior consumer experience and disrupted the entire home-fitness space. My suspicion is, by doing this, it's grown the total market. More players will jump in, imitating Peloton. But if the entire home-fitness market has grown, then there's plenty of room for multiple winners. Peloton's model itself would have to be disrupted -- not just imitated -- before it was a problem.
With incredible user engagement and retention, Peloton can withstand increased competition, and it's another great reason to buy the stock.
Image source: Getty Images.
3. The stock is overvalued
Peloton stock already has a market capitalization of $29 billion and trades at a trailing price-to-sales valuation of about 10, much higher than this time last year. Therefore, investors fear the stock is overvalued. This hesitation is understandable. After all, whether it's stocks or sticks, no one wants to overpay.
If you're buying Peloton stock today, you're betting on long-term, robust growth. This stock isn't for anyone who doubts its growth is sustainable. But beware of measuring its long-term ceiling with its current business alone. It's been on an acquisition spree lately, including its $420 million acquisition of Precor, demonstrating management's commitment to growing its addressable market.
I particularly like the acquisition of Precor because its focus on selling equipment to commercial fitness clubs could help Peloton blur the lines between at-home and brick-and-mortar fitness. But here's the takeaway: Top growth companies tend to keep growing, often in unexpected ways. Given the solidity of its core business and its $2 billion cash pile, Peloton is poised to expand its market, which could make today's valuation seem like a bargain in hindsight. And it's the third reason to consider buying Peloton stock today.
